Get Defensive With These 3 Healthcare Stocks

Includes: AET, ANTM, UNH
by: Simon Monger
With renewed signs of trouble in the economy, at least in employment numbers and the housing sector, investors may want to consider positioning themselves defensively for the time being. One of the best defensive sectors is the healthcare market, since it is far from discretionary spending and is largely funded through government programs or institutional payers.

The sector has benefited from recent policy changes that combined with other factors to generate better-than-expected earnings over the past two quarters. These sentiments were echoed by analysts like Wells Fargo, which Tuesday upgraded the sector to Overweight from Underweight. In addition to improving fundamentals, the analyst added that technical factors also seem to support the upgrade.

Three Healthcare Stocks to Consider

Investors looking for exposure in this sector have many promising opportunities. For example, Aetna Inc. (NYSE:AET), a diversified health care benefits company serving about 35.3 million people, has risen more than 40% year-to-date amid strong earnings results. The company’s recent acquisition of Prodigy Health could propel shares to new highs, while it trades at only 11x expected forward earnings.

UnitedHealth Group Inc. (NYSE:UNH), a diversified health and well-being company, also reported strong earnings of $1.22 per share, compared with 89 cent estimates, last quarter. With improving commercial margins, multiple expansion within the industry, and increased market penetration, many analysts see this stock as another bullish play in a very defensive sector.

Finally, WellPoint Inc. (WLP) is a third health benefits company that has strong prospects moving forward. Despite moving up 40% year-to-date and reporting better-than-expected results last quarter, the company trades at less than 10x its trailing 52-week earnings with a 1.26% dividend yield. Meanwhile, the firm also guided higher for FY2011 in its most recent earnings announcement.

Gaining Cheap Exposure to the Industry

Investors looking to gain cheap exposure to the industry may want to consider purchasing long-term equity anticipation securities, or LEAPS. These long-term stock options can be used as an inexpensive stock substitute without all of the risk associated with shorter term options, like rapid time decay, excessive volatility, and other factors.

Currently, investors can purchase Aetna 40 Jan ’13 LEAPS for $6.80 per contract, UnitedHealth 50 Jan ’13 LEAPS for $7.60 per contract and WellPoint 80 Jan ’13 LEAPS for $9.15 per contract. Combined, the position would cost $2,355 and give investors the right to purchase 100 shares in each of these stocks at roughly today’s prices anytime between now and January 18, 2013.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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